Republic of Azerbaijan - Profit Tax

February 2006

Source: Ministry of Taxes of the Republic of Azerbaijan

Expenses connected with the generation of profit

All expenses connected with obtaining income, as well as mandatory payments stipulated under the legislation are deducted from such income, except for non-deductible expenses. Non-deductible expenses The following expenses are not deducted from income:

expenses incurred on the acquisition and installation of fixed assets as well as other expenses that are characterized as expenses incurred on capital;
expenses connected with non-commercial activity;
food and entertainment expenses, as well as housing and other social expenses of employees.

If the expenses of an enterprise whose entrepreneurial activity is of entertainment nature are incurred within the framework of such activity, expenses incurred on entertainment shall be deducted from the income.
No deduction is allowed with respect to the profit tax or any other tax calculated on profit which has been paid in the territory of the Republic of Azerbaijan or other countries, paid financial sanctions, as well as the actual travel expenses exceeding the limit.

Deductible expenses

Actual amount of interest on debts obtained from abroad, and also paid to each other by interconnected persons (when applying accrual method - amount of interest on payment), is deducted from the profit within the period for which interests are applied, at the same currency and at the amount not exceeding 125 percent of the average interest on inter-bank trade on credits with similar periods, or, if no trade was conducted - on inter-bank credits published by the National Bank of the Azerbaijan Republic;
doubtful debts connected with goods, works and services that have been realized where income from them was previously included in the gross income received from entrepreneurial activity;
amounts assigned by the banks and credit unions engaged in certain types of banking activities for establishment of special reserve funds in accordance with legislation depending on classification of assets;
amounts assigned by a legal entity engaged in insurance activity for establishment of reserve insurance funds within the norms established by the legislation of the Republic of Azerbaijan;
expenditures on research, project-research and experimental-design work conducted with the purpose of making profit (except for the expenditures on the acquisition of fixed assets, their installation and other expenses of a capital nature);
amortization charges for fixed assets;
insurance payments that are paid by insured parties under insurance agreements with the exception of insurance payments on property damage insurance to employees' favor, as well as life insurance made by foreign insurance organizations.

The amount of repair expenses to be deducted for each year is limited to the balance value as of the previous year-end for each category of fixed assets - 2 percent of remaining value of buildings, facilities and installations, 5 percent of remaining value of machinery, equipment, calculation technology and transport means, 3 percent of the remaining value of other assets at the year end, and zero (0) percent on main assets to which the depreciation is not accounted.
In the event when the actual amount of repair expenses is less than the amount established by this limit then the actual amount of repair expenses shall be deductible from income.

Loss-Carry Forward

Part of enterprise costs exceeding incomes, the deduction of which from incomes is allowed, is carried forward for up to 3 years and compensated by the profit of those years without any limitations.

Foreign tax credit

Amounts of profit tax of resident enterprise paid outside the Republic of Azerbaijan from the incomes of not Azerbaijani source is credited upon the payment of tax in the Republic of Azerbaijan.
Amounts of profit tax paid outside the Republic of Azerbaijan must not exceed the amount of tax charged on that profit in the Republic of Azerbaijan at the rates in effect in the Republic of Azerbaijan.

Procedure for recording income and expenditures

In order to reflect taxable income (or profit) clearly, the taxpayer is obliged to maintain accurate and timely records of income and expenditures on the basis of documented data.
Taxpayer may use cash method or accrual method of tax accounting, provided the same method is applied by taxpayer during the tax year.
Taxpayer using cash method must account for income at the moment that it actually receives such income or such income is transferred to its disposal and for expenses - at the moment that these expenses are actually incurred.
The moment that cash monies are received or the moment that said monies are transferred to taxpayer's bank account in case of non-cash payments is considered the moment of receipt of income and the moment of carrying out expenses is the moment that these expenses are actually incurred.
Taxpayer maintaining records using the accrual method must record income and expenditures on the moment when appropriate liability is created regardless of the moment that the income is received or the expenditures are incurred.
If the term of payment, when paying interest on debt obligation or rent on a leased property, covers few reporting periods, expenses shall be allocated over these reporting periods in accordance with the procedure for their calculation.

Tax return

Accounting period for profit tax is a calendar year. The taxpayers must submit a tax return to the tax authorities not later than March 31 of the year following the accounting year. Taxpayers must carry out final calculations and pay taxes before the date established for the submission of tax returns.
In case the enterprise ceases its entrepreneurial activity in the Republic of Azerbaijan, it must submit the return to tax authorities within 30 days. If this is the case, the accounting period shall cover the timeframe from the beginning of tax year until the day of entrepreneurial activity cessation by the enterprise.
If the legal entity or the permanent establishment of a non-resident is liquidated, the liquidation commission or taxpayer must immediately notify the state tax authorities of such liquidation in the manner established by the legislation.
Legal entities are obliged to make current payments to the state budget no later than the 15th day of the month following each quarter. Enterprises and organizations owned by municipalities pay taxes to local budget.
There are 2 methods to determine the amount of current tax payments:

1. The amount of each payment shall be 1/4 of the tax amount calculated in previous tax year.
2. The taxpayer may determine the amounts of current tax payments by multiplying the volume of his income in relevant quarter to coefficient of tax weight in the gross income for previous year (with no consideration of amounts to be deducted from income).

The taxpayer selects annually by April 15 one of the two methods for calculation of the amount of payable taxes within the year and informs the tax authority. In case if the taxpayer chooses the 2nd method, he should submit the certificate on current tax amounts calculated from income or profit within 15 days after the end of each quarter. Otherwise, the tax authority applies the 1st method. In case, when the taxpayer does not inform about the method applied for calculation of the amount of current tax payments, the tax authority applies the first method.
Current tax payments are included in the amount of tax withheld from the taxpayer within the tax year.

Financial sanctions and interests

A financial sanction is imposed on the taxpayer who fails to submit the tax report in timely manner without valid reasons at the value of 40 times of conventional financial unit which equals 44 manats following the decision of tax authority.
In case the amount of tax (including withholding tax) indicated on tax report is less than the amount to be indicated on the report and if taxpayer fails to submit tax report and evades to pay the required tax amount to the budget, the financial sanction shall be imposed on the taxpayer at the rate of 25 percent of understated or evaded tax amount.
For failure to pay the tax or current tax payment in period stipulated by the legislation, the interest at the rate of 0,05 % of the amount of tax or current tax payment is withheld from the taxpayer or tax agent for each day of delay. This interest is applied in respect to current tax payments for the whole period of delay but not more than for 1 year.

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